On Monday, May 13, 2013 we wrote that Gold Prices would Re-Test $1350/oz level and so they did, trading sub $1340/0z at one stage. Gold had fallen for 7 straight days from $1470/oz before the slide was arrested earlier today with a bounce that pushed gold up to $1391/oz. This move correlates inversely with the 7 day winning streak put in by the US$, which also came to an abrupt halt today when it fell 0.50% to close at 83.93 on the US$ Index. As far as we can ascertain there was a few frantic minutes of buying that moved gold higher by around $30.00. Such quick movement suggests that someone who was short wanted to close and close quickly, as gold was climbing slowly but surely at the time. The snap shot below depicts the day’s action:
This looks to us to be more of a Dead Cat Bounce for gold prices rather than a substantial change in direction.
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The Gold Chart:
This capitulation in gold prices wasn't a total capitulation as gold rallied and tried to break through $1500 and challenge the 50dma. Gold then faded until today when it managed to bounce from below $1350 to close at $1391 as the chart indicates.
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Having tested the support level of $1350 on two occasions and survived one could be tempted to feel a little more optimistic about the future price of gold and silver for that matter. After all QE is still the order of the day in the US and Japan has embarked on its own version of easing which has seen the Yen fall by 20% or so. The UK also has a bond buying programme and the ECB could soon follow suit. We should not be surprised if Mario Draghi announces such a plan of action just when the market is not expecting it. All of these actions are inflationary and therefore good for the price of gold. However, the official figures for what they are worth suggest that inflation has not raised its ugly head and the need for gold as a safe haven is not necessary.
This is not the best time of the year for gold as seasonally the summer doldrums arrive and gold prices drift lower until August. Today’s performance by gold is a one off event and should be viewed in the context of a bounce in falling gold market. The long term bull market is not over, but we do need to recognize that there is a short term downward trend in place and it should be taken seriously and acted upon in order to generate profits.
The time to go aggressively long is somewhere in the distance and could prove to be a wonderful buying opportunity for those who have the patience to wait for this down trend to exhaust itself.
Meanwhile we can still turn a profit by utilizing this downward phase to our advantage. You no doubt have formed an opinion as to which of the mining stocks you consider to be top quality and those that you wouldn’t buy even if we gave you the money. The latter group of stocks offers the opportunity to either ‘short’ them or enter the options market and purchase a few Puts on them. This strategy has enabled us to build cash at a time when the precious metals market is heading south. When the turnaround comes we will have a healthy balance sheet and be in a position to pounce on undervalued stocks. If you are not sure which stocks to short then you could take a look at some of the funds that are currently suffering as prices deteriorate. They should broadly reflect the markets movements.
The order of the day is to think short for the short term and wait until we are convinced that the bottom is in before reversing position and hitting the acquisition trail.
If you still believe in the precious metals bull market then the next few months should present you with some astonishingly low priced opportunities. The selection of quality mining stocks should remain a top priority as they will outperform the sector significantly. So, you have the time right now to do the work in preparation for a resumption of the gold bull market, consider it a gift, as your very own due diligence will pay off handsomely.
By. Bob Kirtley